DNA Explainer: Is there a relation between rising prices of petrol and invention of COVID vaccine

Petrol and diesel prices went up for the eighth consecutive day on Wednesday. Petrol in Delhi has now crossed Rs 89 per litre, which is the most expensive so far. Diesel is also very close to Rs 80 per litre. The government cites that global crude oil prices have risen by more than 50% to over USD 63.3 per barrel since October, forcing oil retailers to increase pump prices.

Since India imports 84% of its domestic demands for crude oil, therefore Brent crude prices have a direct bearing on domestic fuel prices. Oil marketing companies revise fuel prices on the basis of international prices. Taxes make a major part of the fuel prices in India. Excise duty and VAT constitute almost 63% of the price of petrol and 60% for diesel.

Why oil prices keep rising in India?

This means that if crude prices fall, retail prices should come down and vice versa. But this is just a theory and in practice this does not happen in India. Oil price decontrol is a one way practice. When the global prices of crude oil  increases, the burden is passed on to the consumer who pays the extra price for oil. 

When the reverse happens, government slaps fresh taxes and levies to ensure that it rakes in extra revenues. This results in the consumer either paying the same rate for petrol and diesel as he or she had been paying or maybe even extra. So the main beneficiary in this price decontrol mechanism is the government. The consumer is the clear loser and so are the fuel retailing companies.

What is fuel decontrol?

Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of ATF in 2002, petrol in the year 2010 and diesel in October 2014.

Prior to that, the Government used to intervene in fixing the price at which the fuel retailers used to sell diesel or petrol.

Fuels such as domestic LPG and kerosene still are under price control.

For other fuels such as petrol, diesel or ATF, the price is supposed to be reflective of the price movements of the so-called Indian basket of crude oil.

Why crude oil prices rising?

As the country went into a COVID induced lockdown, India's OMCs stopped revising petrol and diesel prices for over two months. As the world economies recuperate from the impact of the COVID-19 pandemic, Brent Crude prices have been soaring, and the demand outlook for petroleum products has also improved.

Brent crude price had fallen from USD 66 per barrel at the beginning of 2019 to USD 19 in April due to travel curbs and lockdowns. It has now reached close to USD 50 per barrel.

Brent crude prices, which was trading at about USD 40 per barrel between June and October, started rising in November and has gone past the USD 60 per barrel mark as the global rollout of COVID-19 vaccines gathers pace.

Retail petrol rates have risen by Rs 17.11 per litre in India since mid-March 2020, after the government raised taxes to mop up gains arising from fall in international oil prices. Diesel rates have gone up by Rs 14.54.